February 15, 2012 | Issue #113-3  

More flak for FMV Restricted Stock Study

If the drubbing in the IRS DLOM Job Aid weren’t enough, the FMV Restricted Stock Study just received a four-point critique in a recent posting by a Palm Beach CPA firm. “From a theoretical perspective,” the authors write, the FMV analysis may be vulnerable in these areas:

  • The underlying companies in the database do not represent “American business.”
  • The underlying companies are primarily unprofitable, non-dividend paying, and risky.
  • The two-year holding period restriction data is limited and aged.
  • The majority of transactions are subject to registration rights.

Whether these questions are new, BV appraisers should at least be aware of this new angle of attack on an established methodology for deriving the marketability discount. Lance Hall (FMV Opinions Inc.) promises a response to each point in the next issue of BVWire.

‘Fundamentals of Patent Value’: new free download from IPMV

In an increasingly IP-driven economy, small and mid-sized business owners are frequently asking for a “back of the envelope” assessment of patent value—most often just a single patent. “On the surface, this sounds like a reasonable request,” writes Fernando Torres, chief economist at IPmetrics. “A specialist should be able to review and consider the issued patent document and determine an approximate market value.” However, the analyst may need to remind the owner that a patent’s economic value does not arise from the attributes of the innovation itself: “Its value is derived from its current role in the economy. The invention itself may have scientific, engineering, or even artistic merits,” Torres writes, “but these are not sufficient attributes to determine economic value.”

In his article, “Fundamental Principles of Patent Value,” Torres discusses the two essential drivers of patent value and reminds appraisers (and business owners) when patents may actually represent a net cost. Torres’s article led off the inaugural issue of IP Management & Valuation (IPMV)(Jan. 2012), the new publication devoted entirely to the identification, evaluation, protection and growth of IP assets. To sample IPMV, go to our free downloads page, where we’ve just posted Torres’s complete article.  

New Monte Carlo workshop intensive

Since 2004, the FASB has accepted if not encouraged the use of a lattice model “or valuation technique, such as a Monte Carlo simulation technique,” in the assessment of share-based compensation under FAS 123R (now Topic 718). A Monte Carlo simulation can accommodate “the term structures of risk-free interest rates and expected volatility, as well as expected changes in dividends over an option’s contractual term.” 

Create supportable, auditable assumptions in your simulations: On Thursday, March 8, David Dufendach and Jason Andrews (both Grant Thornton) will present the Advanced Workshop on Monte-Carlo Simulations, an intensive, four-hour workshop, that will demystify this powerful modeling technique through case studies and hands-on examples.  In another exclusive: Oracle Crystal Ball will sponsor the workshop (although attendees do not need any special knowledge or any particular computer program).

Tax Court denies DLOM for ‘cashless’ exercise of stock option

The president of a very successful, privately held business went through a bitter divorce, in which his wife demanded half of his shares, which accounted for a 23% interest but also held voting rights to the remaining shares, held by his two sons. One of the sons—who also managed the business—used the situation to compel the father to transfer half of his holdings to his wife, subject to a cashless option to repurchase the shares for $16 million. Essentially, on exercising the option, the father would receive a formula-determined number of shares that were worth $16 million less than the value of the total number of shares transferred to the wife.

Two years later, the father exercised the option and ended his involvement with the business. The company deducted the value of the shares as compensation, but the father declared no taxable income related to the exercise. The IRS issued a “whipsaw” notice, denying the company’s deduction and declaring the $37 million as income to the dad. At trial, the Tax Court upheld the company’s deduction as reasonable compensation for the father’s efforts in guiding the firm to its success. However, it denied the father’s argument—supported by a business appraisal from a reputable firm—that the value of the shares should include a 30% marketability discount. The company never would have accepted stock with a “real fair market value of $11.2 million for payment of the $16 million exercise price,” or the equivalent of 70 cents on the dollar, the court said, in concluding that the entire $37 million was taxable income to the dad. Read the complete digest of Davis v. Commissioner, T.C. Memo 2011—286 (Dec. 12, 2011) in the March 2012 Business Valuation Update; the court’s decision will be posted soon at BVLaw.

How to stop the ‘hired gun’ question before it kills credibility

Litigation experts know what’s coming when they hear opposing counsel ask: “So … just how many times have you been hired by Mr. (or Ms.) Attorney?” Or worse—“Isn’t it true that you are his ‘go-to’ expert?”

The attorney is trying to paint the expert as a “hired gun,” of course—but the next time that happens, try this response: “I’ve worked on cases against the same attorney, too. Shall I tell you about them?”  The aggressive line of questioning “immediately stops,” says Neil Beaton (Grant Thornton), who frequently speaks on litigation tactics (most recently at the AICPA’s National BV Conference in Las Vegas). Since it’s so important to maintain a reputation of neutrality and credibility, Beaton suggests that expert business appraisers don’t let the same law firm or attorney repeatedly (or exclusively) retain them. “You don’t want to be a hired gun,” he said, even in smaller communities in which attorneys may not have as many choices among available experts. Even so, watch out for relationships with attorneys that get too close. “So—how many times have you had dinner at Attorney X’s house?” can be a killer question, so try to keep your professional relationships as neutral as possible, too.

Valuing radio stations could get a boost from FCC’s proposed rule

Last December, the Federal Communications Commission issued a proposed rule (11-286) that would relax its long-standing limit on the ability of companies to own both a newspaper and a television or radio station in the same local market. The proposed rule would also permit the cross-ownership of television and radio stations. Public comments are due in March and replies by April, after which the FCC is expected to take further action.

A relaxed rule could lead to more sales (and valuations) of radio stations. Be prepared with Valuing Radio Stations on February 23, when Peter Bowman (Bowman Valuation) and industry expert Paul Fink (St. Clair Co.) discuss how to value radio stations in the information age, including the treatment of additional  services (Internet streaming and/or news and online chat services) and compliance with FCC licensing and other regulatory requirements.

10 ways to improve IFRS Foundation

Last week the IFRS Foundation Monitoring Board released its Final Report on the Review of the IFRS Foundation’s Governance, completing a two-year project to assess whether the foundation’s structure sufficiently promoted the primary mission of the International Accounting Standards Board (IASB) to develop “high quality, understandable, enforceable and globally accepted accounting standards” while maintaining the “accountability and independence of the IASB,” according to the report’s executive summary. After considering stakeholder feedback, the Monitoring Board intends to proceed with certain enhancements including:

  1. membership and capital markets representation
  2. consensus-based decision making
  3. involvement of other public and international authorities
  4. referrals to IASB agenda items
  5. selection of IASB chair
  6. framework for IASB composition
  7. transparency of Monitoring Board functions
  8. foundation funding
  9. Monitoring Board Secretariat
  10. periodic governance reviews

Don’t worry—you can still subscribe to our healthcare Symposium

The 2012 Online Symposium on Healthcare Valuation continues on February 28 with The Valuation of Hospitals, featuring Don Barbo (Deloitte Financial Advisory Services) and Robert Mundy (GatesMoore). This part 2 of the popular BVR series addresses how to appraise the most iconic entity in the healthcare industry: the hospital, with all of its technical, regulatory, and business challenges.

Haven’t registered yet for the 2012 Online Symposium on Healthcare Valuation? It’s not too late to hear from experts and industry insiders—and, in addition to automatic access to the remaining 11 installments, subscribers will also get access to the Healthcare Desktop Learning Center, an online, multimedia library of all past BVR healthcare webinars, including the entire 2011 Symposium and the first installment of the 2012 Symposium.


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